wwwcubusinesscom December 2014 Credit Union BUSINESS 21

The Pursuit of theUltimate Credit Union Credit Card Program

By Ondine Irving

Has your card program growth stalled Have you been advised you need to implement costly acquisition and activation campaigns in order to increase balances As I have stated in the past the profitability from card programs is

driven more by balances (finance charge income) than by usage (interchange) and total accounts (expense) The formula is quite simple increase credit lines (responsibly) and card loan growth can and will occur As a whole credit unions are very conservative with their card programs and unsecured lending I donrsquot like to compare the credit union industry averages to bankcard programs because a credit unionrsquos card profitability and operating models are very different from the major bankcard issuers Yet the single similarity is the consumerrsquos perception a strong credit line can make the difference between the ldquogo-to cardrdquo and the ldquobackup cardrdquo

Average Credit LinesIn order to meet lending goals and maximize the credit card marketing budget the very first things your marketers and lending staff need to be aware of are the average credit line and the current credit utilization ratios of each program within the card portfolio If I told you that the average credit union credit card line (all lines outstanding divided by the number of accounts on file) is just $4800 ndash with an average balance hovering at $2200 creating an average credit-line utilization ratio pushing 45 percent ndash would you believe me that any promised methods of growing your card loans with costly campaigns by processors and other advisers is a lost cause I might add that a contributor

to this low average overall credit line is driven by the influx of low credit lines on secured and starter cards Many credit unions may start a consumer off with $500 and this will drive down your portfolio average and thatrsquos to say nothing of your overall profitability Therefore I suggest you break down the credit-line utilization ratio by each card program and create line increase strategies for each individual program This strategy would also involve reviewing any secured card portfolio for increases or upgrades to an unsecured program Credit-line assignment will drive your portfolio growth more than any other marketing campaign Generous responsible credit lines will bring in the balances needed to

gtgt CARD SOLUTIONSgtgt PART TWO OF A FIVE PART SERIES

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Outsourcing ATM network management to Dolphin Debit eliminates the capital costs associated with ATM ownership while reducing operating expenses by as much as 30 Save time and money with Dolphin Debit

Irsquove never felt so up-to-date and compliant Thank you Dolphin Debitndash Drive-Up ATM Community Resource CU

Continue the conversation at dolphindebitcomcopy 2014 Dolphin Debit

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22 Credit Union BUSINESS December 2014 wwwcubusinesscom

boost finance charge income ndash the main driver of your bottom line This is where you should be spending your marketing dollars ndash scoring and evaluating cardholders for line increases ndash not by increasing the credit unionrsquos expense by adding new accounts in the hope of getting new balances See what you can do with your existing cardholders first before adding more to a sub-performing portfolio The single most effective strategy most credit unions can implement to promote credit card loan growth is to review their average credit line average balance and current credit-line utilization ratio on a regular basis It doesnrsquot matter if this is semi-annually bi-annually or annually just have a plan in place You can spend all kinds of money and be promised all kinds of results but if your credit line is less than optimal and your portfoliorsquos credit-line utilization ratio exceeds 35 percent no amount of marketing effort will grow your program Any attempts at growth will get mediocre if any substantial results If your credit lines are too low and existing balances are bumping up credit lines donrsquot waste your efforts on analyzing cardholder behavior Review your credit lines and get them to the five-digit range for qualified cardholders If the existing credit-line utilization ratio is greater than 35 percent guess what No amount of marketing campaigns will have an effect on your portfolio balances Do a credit line increase In most cases the cost will be a few thousand dollars depending on the size of your program As a consumer would you use a credit card with an average line of $4800 How would you view that issuer especially if you have a strong annual income Perhaps one would use a low credit-line card as a backup like a department store card If the banks are offering five-digit credit lines with better perks it is easy to understand how credit lines play a big part It is perception and value by the member

Credit-Line Increases Post CARD ActThe credit union industry has been inundated with so many different interpretations of the CARD Act that many credit unions have shied away from automatic credit-line increase reviews ndash mainly due to the ldquoability to repayrdquo requirement Because of this many credit unions have no regularly scheduled credit-line increase review policy in place So as balances and usage increase while credit lines remain unchanged at some point the

growth in card loan balances will hit a brick wall and usage will come to a screeching halt The ldquoability to repayrdquo and ldquoincome verificationrdquo are the two terms that have held back many credit unions from credit-line increases According to a recent Equifax white paper ldquoRecapturing Credit Line Increasesrdquo credit-line increases are indeed possible post CARD Act The ldquoability to payrdquo requirement from the CARD Act has been satisfied via income verification from income estimators (available via most credit bureaus) and has been deemed acceptable as ability to pay Under Reg Z credit card issuers cannot open a credit card account or increase the credit limit of an existing account without considering a consumerrsquos ability to make the required payments To assess ability to pay for a credit-line increase credit card issuers may rely on financial information provided by the consumer ndash so-called stated income ndash or they may use third-party verified income data (Source Federal Reserve Bank of Philadelphia and Equifax research) Another suggestion for keeping credit-line increases alive at your credit union is to get the word out to members via statement messages phone system messages website banners and e-mails Let the members know you have money to lend

Calculating Credit Utilization RatiosIn order to determine if existing credit lines are halting your balance growth you need to first understand and calculate the current ldquocredit utilization ratiordquo of each program within your portfolio Below is a table indicating a credit unionrsquos total credit line outstanding by program along with total balances The formula is simple balances (total or average) divided by credit lines (total or average) This will create a ratio ndash the credit utilization ratio ndash that ideally should be less than 35 percent I prefer to calculate this ratio two ways to include ldquoall accountsrdquo and ldquoaccounts with balancesrdquo This gives me a better idea of those who are more in need of a line increase ndash typically those who carry balances Looking at the example below this credit union is in desperate need of a line-increase review for all programs because the line utilization ratio for accounts with balances exceeds 50 percent

gtgt CARD SOLUTIONS

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Magner_CreditUnion_FullPg_103014_outlineindd 1 103014 422 PM

wwwcubusinesscom December 2014 Credit Union BUSINESS 23

I would also like to mention the fact that many credit unions do not zero out credit lines on lost stolen and statused accounts This actually overinflates the credit-line liability as a whole ndash often by millions of dollars ndash but this is another article For now we will work with the data as provided by your processor

Credit- Line Increase CriteriaI suggest credit unions consult with either their card processor or their credit bureau provider to establish criteria for implementing line increases There are many factors to take into account including age of account existing limit date of last increase current balance delinquency and the ability to repay Equally important is how you are going to reward those responsible cardholders ndash by a flat dollar amount or a percentage of their existing line The biggest mistake I see credit unions committing is making a credit-line increase a ldquoflatrdquo dollar amount rather than a percentage of the current line Letrsquos face it if a cardholder has been with you for more than five years has outstanding repayment history and currently has a $4000 line how do you think they would feel with a $500 increase (13 percent) As shown in the table below a fixed increase of $500 is actually a reduced percentage for those with higher established limits to start with Moreover the percentage of credit-line increase is often minimal and can be viewed as an insult to your members

In the table below if the average line is $4500 it is clear that a 10 percent to 25 percent increase makes a more significant impact and sends a stronger message to your valued member That is of course after all the pre-established criteria have been met deeming the member a valuable and responsible cardholder Part of assigning line increases involves higher increases in the 35 percent to 50 percent range for higher-ranking members while the C and D members may receive only a 10 percent to 15 percent increase Do not treat A members the same as C D and E members for line increases

gtgt CARD SOLUTIONS

24 Credit Union BUSINESS December 2014 wwwcubusinesscom

Suggested Credit-Line GuidelinesCredit-line assignments should be primarily dictated by 1) credit quality of the cardholder and 2) cardholder monthly gross income Below are suggested guidelines regarding total unsecured lending limits for members (inclusive of credit cards and other unsecured loans) These suggestions come via Rex Johnson founder of Lending Solutions Consulting Note these recommendations represent TOTAL unsecured limits so keep this in mind if you offer other unsecured products in addition to a credit card

Scheduling of Credit-Line IncreasesThe key to the success of credit-line increase reviews is in the timing Clearly there are three distinct times of year in which you want to ensure your qualified members have ample room on their credit card 1) back to school shopping (aim to have increase available mid-July) 2) holiday shopping (aim to have increase available mid-October) and 3) post-holidaybalance transfer season (aim to have increase available early January)

In SummaryCalculate the following for your credit union card portfolio (by program) in the following steps

1 Determine average credit line by program2 Determine average balance by program3 Calculate credit utilization ratio by program

If higher than 35 percent consider the following1 Confer with processor or preferred credit bureau provider2 Establish criteria for qualifying cardholders for increase3 Set increases as a percentage of current line4 Schedule increase to occur during prime times outlined in article

This may be the single easiest and most effective way you have ever seen your credit card loans grow ndash not to mention the most cost effective Sit back and watch

Ondine Irving has been part of the credit union community since 1985 and founded Card Analysis Solutions (wwwcardanalysissolutionsorg) in November 2003 after a 12-year career at Baxter Credit Union five years at Certegy Card Services (now FIS) a short time with

Raddon Financial Group and in 2010 a stint working with Suze Orman Ondine is the creator of the original ldquoSchool of Credit Card Program Managementrdquo which debuted in 2008 These popular classes sell out 60 days in advance In 2015 locations include Orlando New Orleans Charleston San Diego and Las Vegas Her focus is to teach credit unions in an objective manner the expense savings and income opportunities of the credit card portfolio and she strongly believes credit unions should issue and manage their own card programs Ondine also works one on one with credit unions around the nation and to date has worked with over 500 credit unions Visit wwwGoCUCardscom or wwwCardAnalysisSolutionsorg for more information

Past Editionsbull Part 1 The Great Rate DebateFuture Editionsbull Part 3 Most Misunderstood Theories of Card Program Managementbull Part 4 Statement of Credit Card Program Factsbull Part 5 Credit Union Loyalty Programs

themembersgroupcom | 8002681884

gtgt CARD SOLUTIONS

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